Pa. faces perfect storm of tax increases/spending cuts

Monday

Nov 26, 2012 at 12:01 AM

Pennsylvanians will face billions of dollars in higher taxes unless Congress acts by the end of the year to defuse a threatening combination of tax increases and spending cuts contained in the so-called "fiscal cliff."

ERIC BOEHM

HARRISBURG — Pennsylvanians will face billions of dollars in higher taxes unless Congress acts by the end of the year to defuse a threatening combination of tax increases and spending cuts contained in the so-called "fiscal cliff."

A recent report by the state's Independent Fiscal Office, Pennsylvania's version of the federal Congressional Budget Office, suggests the fiscal cliff would drain billions from Pennsylvania's economy, putting a strain on state tax revenues and the state budget.

Based on estimates from the Tax Policy Center, a nonpartisan think tank in Washington, D.C., the IFO projects the fiscal cliff will raise federal taxes by $536 billion — with about 4.1 percent of that total, or $22 billion, coming from the pockets of Pennsylvania taxpayers.

Nationally, analysts believe the fiscal cliff will substantially reduce economic growth and may tip the nation into another recession in 2013.

Matthew Knittel, director of the IFO, said he expects the consequences of the fiscal cliff in Pennsylvania to mirror whatever happens nationally.

"If none of these (tax cuts) get extended, it would have a significant drag on economic growth, and there is no reason to think the effect in Pennsylvania would be any different," he said.

Knittel said the $22 billion tax hike is the "worst-case scenario," because most experts believe a "mixed bag" of tax cuts and spending would be extended into 2013.

The fiscal cliff is a combination of the expiration of the Bush-era tax cuts and a cost-cutting maneuver known as sequestration, enacted by Congress during the tense battle over raising the debt limit in 2011.

The expiration of the tax cuts would mean higher income taxes for all Americans, along with higher taxes on capital gains, larger payments for Social Security and a 50 percent reduction in the child tax credit.

On the spending side, sequestration would cause about $110 billion in cuts at the federal level, resulting in the loss of about $60 million in federal grants for Pennsylvania.

It would not affect federal funding for Medicaid or transportation, but it could hit grants that fund defense, education and other subsidies to states.

Whatever outcome congressional leaders agree to will have significant effects on state governments, said Anne Stauffer, a project director for the Pew Center on the States, a national nonprofit think tank based in Washington, D.C.

"The fiscal cliff is not just a federal issue," Stauffer said. "The implications for states should be part of the discussion so that problems are not simply shifted from one level of government to another."

Many states use the federal deductions to determine taxable income at the state level, meaning the end of some federal deductions could cause higher income taxes at the state level, as well.

Fortunately for Pennsylvania, the state uses a flat income tax with few deductions not linked to the federal tax system, so taxpayers in the Keystone State will not be hit with that same double-whammy of higher taxes, though it would still have to deal with the loss of 7 percent of federal grants, about in line with the national average.

Even if Pennsylvania dodges part of the tax bullet, higher federal taxes on payroll and income means less cash in consumers' wallets — and that translates into lower sales tax collections at the state level.

Knittel said it is likely the payroll tax cut won't be extended.

If so, Pennsylvanians' paychecks will be a total of $5 billion lighter next year, after the rate jumps from 4.2 percent to 6.2 percent.

The payroll tax increase means the average household in Pennsylvania with an income of $50,000 would face $1,000 in additional taxes, even before higher income taxes or other costs are figured.